There are times when the Times' finance blog reads like a thinly-disguised PR vehicle. This is one of those times.
From the moment I first heard about the SEC’s 17-year history of document-shredding, I started wondering what defense the agency would eventually offer. For surely there had to be one; no great bureaucracy, public or private, just sits back and lazily accepts allegations of gross incompetence and/or corruption. There is always blowback, usually in the form of an outraged denial, and sometimes in the form of an attack upon the messenger, but always something.
But in this particular case, in which one of the SEC’s own has come forward and told congress that the agency has been systematically destroying its own intelligence over the course of three presidencies, there hasn’t been any of this. My first clue came when I called the SEC before the story came out and asked them about the allegations by SEC attorney/whistleblower Darcy Flynn. I sent them a detailed questionnaire, both about the document disposal and the mini cover-up among SEC higher-ups like former Goldman executive Adam Storch (who was not sure he should “take on this exposure voluntarily,” because the SEC FOIA officer told him there “might be criminal liability”). Then, when I called back, I expected them to deny the whole thing and trash Flynn as an unreliable disgruntled employee.
They did none of that. Instead, to my amazement, SEC spokesperson John Nester copped to the document destruction right away when I got him on the phone. When I asked him how long it had been going on, Nester not only offered that it had been “at least the early nineties,” but volunteered, without my even asking about it, that he couldn’t be sure it hadn’t “always been the policy.” He didn’t deny any of Flynn’s allegations at all. It was a very weird call – I kept waiting for the other shoe to drop, and it never did.
Well, the SEC’s response finally did come down the pipeline yesterday, via the usual source – the New York Times’ banker-sponsored Dealbook blog, which is fast becoming the official mouthpiece of all guilty Wall Street. Although the Times in general has been home to some outstanding investigative journalism with regard to the financial services industry, the Dealbook blog occasionally feels like a thinly-disguised PR vehicle. This is one of those times, as Professor Peter Henning of Wayne University has now submitted what reads like a lengthy apologia on behalf of the SEC.
The crux of Henning’s argument is as follows:
The actual document destruction, which ended last year, probably had no significant effect on any continuing investigations because it only applied to inquiries dropped early. The greater effect is more likely to be on the S.E.C.’s reputation as a credible law enforcement agency, especially in cases involving corporate internal controls.
So the argument is going to be that the SEC destroying 17 years’ worth of case documents is not consequential. The only thing that is consequential, in Henning’s mind, is the damage to the SEC caused by the revelation of this policy.
Further down in Henning’s piece, he adds the following:
What is clear, however, is a policy that may have violated federal law raises the specter that the S.E.C. was more concerned with making its life easier by getting rid of documents rather than complying with burdensome regulations. That is an often-repeated complaint about the S.E.C.’s own rules, a claim that might now gain greater resonance.
Amazingly, Henning is using the SEC story as a means to argue that SEC regulations and reporting requirements are generally both burdensome and meaningless. It’s actually sort of a brilliant argument, when you think about it: if it’s too much of a bother for the SEC to follow its own rules, that means the rules must generally be stupid and, therefore, nobody should have to follow them.
Henning makes a lot of arguments in defense of the SEC, of varying levels of absurdity. Among them:
The S.E.C.’s document destruction policy only applied to MUIs that did not become investigations. The fact that a MUI was opened is available in the S.E.C.’s internal records, along with any description provided about the subject matter and investigative subjects when it first commenced.
Actually this is not true. We know for a fact, thanks to Flynn, that these descriptions he speaks of often did not survive at all, unless he’s talking about one like with a names, start and end dates, and a one or two-word heading (one example provided by Flynn read simply, “Deutsche Bank MHO-09356 11-1/01- 7/3/02 Insider Trading”). According to Henning, however, these one-line entries are not as useless as they might appear to be to the untrained eye [emphasis mine]:
The documents that were not retained from a MUI, appear to be items gathered before it closed, including trading records, interview notes and accounting documents. The enforcement division theoretically could obtain the information again if a new investigation were commenced, although it might not know what conclusions were reached in the earlier inquiry.
In other words, the fact that the SEC destroyed 17 years’ worth of work is no big deal, because we could always just do that 17 years’ worth of work all over again – if we knew where to start, that is, which we don’t, because we destroyed all the records containing the original leads. How is some future SEC investigator supposed to redo a MUI if the only information he has is a one-line entry that reads, “Goldman Sachs 6/15/99-4/28/2000 MLA-01909 Market Manipulation”? Is he supposed to call a psychic buddy line to find out the original source of the file? Is the phone number of the original complainant hidden in an anagram in that one line somewhere? This is really silly stuff.
The decision to open a MUI involves a low threshold of evidence, and according to the S.E.C.’s enforcement manual they ‘are preliminary in nature and typically involve incomplete information.’ I
In other words, these were not important cases. The problem with this is that we know for sure that many of these cases were very consequential. For example, at least two of these MUIs involved Bernie Madoff. Even Henning couldn’t possibly argue that the Madoff case was much ado about nothing. How about a fraud case involving Lehman Brothers in 2002? Or the three cases involving SAC Capital? Or the myriad cases involving companies like Goldman, Citi, Bank of America, and so on?
The wave of corruption that blew up in 2008, and has since gone almost completely unpunished, belies this argument. We know that there was massive corruption on Wall Street during this time period involving the very companies tied to these MUIs. I can’t imagine anyone takes seriously the idea that none of these 9,000 or so files contained valuable intelligence. If even a hundredth of them contained the names of potential witnesses or sources, we’re talking about a treasure trove of lost leads.
There were other issues with Henning’s piece, including the complaint that these MUIs could be created on the whims of low-level employees, without the apparently expert and impartial guidance of senior SEC personnel. “The decision to open a MUI is usually made by low-level staff members, often without consulting senior managers,” he deadpanned, adding that “the inquiry can be initiated on just the suspicion that something wrong happened, such as unusual stock trading before an announcement or the abrupt resignation of an auditor.”
In reality, many MUIs were only created after a self-regulating organization like the New York Stock Exchange or FINRA had already conducted an investigation, and had sent material to the SEC to evaluate.
Also, much of the import of revelations by SEC whistleblowers like Flynn, Gary Aguirre, and the examiners in the Stanford case down in Texas show that the “lower-level” staff members are often the more reliable SEC employees. They’re the career investigators, while “senior staff” are often appointees with ties to Wall Street – so it’s not exactly encouraging to know that the only cases that were shredded were the ones that were worked by the non-appointed, close-to-the-ground, career investigators in the agency.
There are so many revelations flying around Wall Street this week that it’s hard to keep track of all of them. When news that Lloyd Blankfein hired a hotshot criminal attorney leaked out, Goldman’s stock plunged nearly 5%.
Meanwhile, another whistleblower came forward within Moody’s, confirming what we already knew from the investigations of both the FCIC and the Senate Permanent Subcommittee on Investigations – that the ratings agencies knowingly gave crappy instruments high ratings in order to keep their banker clients happy.
We hear also that the Obama administration is leaning on New York Attorney General Eric Schneiderman to back off his investigation into securitization practices, apparently in the hope that he will sign on to the bogus settlement deal being cooked up by the other Attorneys General that would insulate the banks from liability for the massive securitization frauds that left millions of people in foreclosure.
The collective picture one draws from all of this is one of widespread chaos and lawlessness, in which only certain independent pockets within a generally compromised regulatory structure – a state Attorney General here, a Senate Subcommittee there – can be relied upon to fight crime and corruption in the financial services industry.
The SEC shredding story is a small but definite part of that grim overall picture, showing how the ostensible top cop on Wall Street systematically suppressed its own investigators while protecting would-be targets by destroying records of their past misdeeds. The agency’s only conceivable defense in this matter would have been that it didn’t happen, that Flynn was mistaken and in fact they did keep all those files.
Since they can’t say that, this Henning piece is more or less what they’re left with as a defense. I imagine readers can draw their own conclusions there.
Note: wanted also to post the link to my appearance on Democracy Now.